The REAL data on Groupon’s performance

While half the Internet spent the weekend poring through Groupon's S1 filing and raised a lot of questions (and concerns), I called up a friend of mine for an extremely interesting chat instead. Ronan Perceval is the CEO of Phorest, the leading beauty salon appointment software company in the UK and Ireland. Their products are used both in salons (appointment management and CRM) and online (for consumer booking). So whenever a salon in the UK or Ireland runs a deal with Groupon, it most likely ends up being processed by Phorest's software. Here's what he had to say:

Only about 1% of Groupon users become regular customers.Groupon represents about 50% of the deals run by our clients. It's easily the most effective way to get hundreds or even thousands of people through the door of a salon with one day's advertising. The problem is that the cost of sale doesn't really add up for the salon owner. Generally a salon only needs to convert about 10% of Groupon buyers into regular clients for it to make financial sense but based on our internal data we're only seeing conversion rates of about 1%. Think about that for a second. A salon with three staff sells a thousand deals and only ten of these come back again and pay normal prices. That's over a thousand man hours (at least two months) of loss-making treatments to gain seven new clients.

Groupon's churn rate could be as high as 90%.Out of all our salons who have run a Groupon deal, only about 10% are either planning to (or have already) run a second campaign. However, this 10% actually needs to be qualified as an increasing number of smaller salons now survive solely on Groupon deals. This phenomenon happens when a salon runs a very successful Groupon deal but spends so much time servicing it that they lose all their original clients. They then have no choice but to go back to the well and run another Groupon deal just to ensure their survival. These salons are then caught in a deal-loop where they can't escape Groupon!

Most established salons simply will not run a second Groupon (or other daily deal offer)-the conversion rates are just too low.

Is Groupon actually becoming a virtual salon business?A typical salon business is built on word of mouth - where friends recommend a stylist who does a great job and therefore is willing to pay a decent price. Groupon clients couldn't care less about the quality - they just want the deal. And they know there will be another deal next month for the same treatment. This has led to an interesting phenomenon where Groupon will offer certain types of treatments on a regular basis but in different salons e.g. you can get a spray-tan deal in Dublin usually once a month. So for a material percentage of users, Groupon has effectively become a virtual salon, using actual salons to carry out the service in question for users.

What should Groupon be doing to fix this?They need to start looking hard at the ecosystem below the consumer level. Like right now. Groupon and LivingSocial must both get better at helping their clients be more productive with their deals, t he same way that Ebay has done.

End-note Three things struck me from our conversation. First, Groupon's bankers are earning their money. Second, there's a huge market opportunity in deal optimization coming down the line (similar to what Ronan and the team are doing here). Third, I have the strangest desire to find a sun-bed.